Will we see the end of Payday Loans?

Payday lenders appeal to people in desperate times, giving hope in the form of quick cash. Money borrowed through payday lenders is typically due by the next payday and can cost up to $30 per $100. To someone in need that can at first seem like a reasonable charge, but it translates to something like 650% interest. And usually when that next payday hits the borrower can’t afford to pay the loan.

So now Colorado hopes to join New York, Oregon, Ohio, Arizona and Virginia in putting a cap on payday lenders. Colorado proposes to reduce the interest consumers pay to 45%. Other states have set the cap at 36%. The Colorado bill, though moving forward, is stalled by proponents who worry about running payday lenders out of the state. Meanwhile Ohio (payday legislature is still in the works there) points to payday lenders as one of the primary causes for their crashed housing market.

So why is Colorado worried about the payday lenders?

In his counterpoint article for the Rocky Mountain News, Darrin Anderson, president of the Community Financial Services Association of America says:

The truth is that the customers we service every day are smart, capable, rational individuals. They may not have substantial savings, but they are perfectly able to manage their personal accounts. They are hard-working, responsible people who take care of themselves and their families. When they come to the decision to take out a payday advance, it is after they have carefully considered the cost of the service, compared it to the cost of alternatives and decided that the best value for their circumstances is a payday advance.

Colorado doesn’t need to worry. The Internet is another source of payday loans.

There’s always a loop hole. New York (one of the states to pass payday loan caps) is finding that Internet payday loans have also been pervasive. Internet lenders hit consumers with flashy banner ads. Unlike brick and mortar shops they setup automatic withdrawals from client bank accounts. This can add security risks since it requires account access. But the bigger risk is that the borrower doesn’t have enough money in their account to cover the loan and it’s fees. The lender will take what they can sending the borrower into NSF fees and keeping them in debt.

Are payday lenders a necessary vermin of every society? Should we call in the Pied Piper? Or are do adults have the right to freedom of choice as Darrin Anderson says?